Publication: Mortgage Design and Slow Recoveries: The Role of Recourse and Default
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2023-05-12
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Oxford University Press
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We show that mortgage recourse systems, by discouraging default, magnify the impact of nominal rigidities. They cause deeper and more persistent recessions. This mechanism can account for up to 31% of the recovery gap during the Great Recession between the U.S., mostly a non-recourse economy, and Spain, a recourse economy. General equilibrium effects explain most of the differences between mortgage systems. With recourse, highly indebted homeowners dramatically cut consumption in a crisis, and account for a larger share of the aggregate consumption decline. However, without recourse, mortgages would be more expensive for riskier households, and homeownership rates would be lower.
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Attribution-NonCommercial-NoDerivatives 4.0 International
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IE Business School
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Pedro Gete, Franco Zecchetto, Mortgage Design and Slow Recoveries: The Role of Recourse and Default, The Review of Economic Studies, Volume 91, Issue 2, March 2024, Pages 1039–1084, https://doi.org/10.1093/restud/rdad055